My client was an investment adviser who managed a hedge fund. The disclosure documents for the fund stated that the fund would invest in equity securities of a wide variety of companies, including private ones. The disclosure also stated that the fund might acquire control over smaller companies. In fact, the adviser had taken board positions in a number of companies to get an inside view of them and see whether he could help management achieve enhanced performance. If the adviser saw a strong opportunity, he might choose to invest in such a company. Since the adviser had most of his money invested in his own fund, his preference was to use the fund as the vehicle with which to buy shares in these companies. By doing so, the adviser would be aligning his personal interest with those of his investors. This strategy is fairly common. Funds run by activist managers are quite popular among investors.

The disclosure did not state that that the adviser viewed the companies on whose boards he sat as investment targets. The reason for this was that the adviser did not want his clients to be tempted to buy shares in these companies prematurely and thus put upward pressure on the price before the adviser could cut a deal for the fund. One such company was a private company that was listed on OTC Pink ®. To qualify for this market and still remain private, a company may not have more than 500 non-accredited (or 2,000 accredited) stockholders. (Were the company to exceed these thresholds, it would have to register as a public company under the Exchange Act.) Given the small stockholder base of a listed private company, any large trade can have a significant impact on the stock price.

After a few months of serving on the board, the adviser was approached by a venture capitalist who held convertible preferred stock in the company. The VC decided to sell his position at a loss. He was willing to settle for just one third of what he had originally paid. The adviser jumped at the opportunity, because not only would he hold stock that in the fund’s hands had a 3X liquidation preference, but he would also have effective control over the company.

Much to our surprise, the adviser received a letter from a state securities regulator. The regulator alleged that the purchase of the preferred stock by the adviser on behalf of the fund constituted a breach of fiduciary duties because some of the fund investors did not learn about the adviser’s board seat until the transaction was reported to them. Of course, the investors could exit the fund at any time, or the preferred stock could have been placed into a side pocket (an arrangement where an investment can be shared among a subgroup of investors without any impact on the other investors). But none of the investors wanted out. In fact, the upside potential of the transaction was so lucrative that the adviser shut the fund to new investors altogether.

A fiduciary is an agent who must act in the sole interest of and for the benefit of the principal. Fees and other forms of compensation that fiduciaries earn for this work must be disclosed so that principals can decide whether or not to engage the fiduciary as their agent. In addition, any actual and current conflict of interest must be disclosed. Directors of corporations have fiduciary duties to their stockholders. Investment advisers have fiduciary duties to their investor clients. When a fund manager serves on the board of a company and then buys stock in that company on behalf of the fund, the adviser might face a conflict in the future.

Courts have wrestled with the conflict directors face when reconciling the contractual rights of preferred stockholders and the board’s fiduciary duties towards the common stockholders. In all the cases of which I’m aware, the courts are concerned with the interests of the common stockholders, because the conflict inures completely and absolutely to the benefit of the preferred stockholders. A sale of the company for an amount up to and including the liquidation preference would wipe out the common stockholders. In addition, when the preferred stockholders have a controlling vote and their representatives (typically fund managers) hold a majority of the board seats (or can reconstitute the board to gain such a majority), it is only the fiduciary duties towards the common stockholders that limits the power of the preferred stockholder’s representative on the board. The cases where directors are admonished by courts involve a fire sale of the company to satisfy the liquidation preference of the preferred stockholders, or other egregious behavior.

The regulator turned the issue on its head. Their worry was that despite the liquidation preference, the voting control and the strong alignment of economic interests, somehow the adviser, acting as a director of the corporation, had betrayed or was going to betray the interests of the fund’s investors. These of course are the preferred stockholders that the court cases never address, because, presumably, they are protected contractually by their preferences. In our conversations with the regulator, we repeatedly asked how and why this betrayal occurred or would occur, but we never received an answer; they just kept threatening to bring an enforcement action. The regulator cited no cases where a court had wrestled with this issue, and after an exhaustive search, I didn’t find any either. Further, as we pointed out to the regulator, no one ever got rich off of board fees for issuers of penny stocks and, as mentioned above, the adviser had most of his wealth invested in the fund.

As things stand, neither my client nor I understand what my client did wrong and how he or others could avoid running afoul of the regulator’s enforcement actions in this area in the future. In the “consent” order that the adviser was forced to sign to avoid being charged, the regulator focused on an alleged deficiency in the fund’s disclosure. The regulator presumably took this approach because they couldn’t find a reason why the transaction itself was inappropriate. Doubling down, the regulator then took the position that disclosure in advance of the purchase of the preferred stock was required. What that advance disclosure might look like is anyone’s guess, because before being approached by the VC the adviser would have had no idea in what ways his fiduciary duties to the common stockholders might impact the management of the fund. Upon joining the board, the adviser would not know that he might later be able to purchase the preferred stock at a steep discount . In fact, the adviser would have no idea what sort of opportunities to invest in the company would come his way. Further, he would have found no legal guidance on what disclosure might look like concerning the many possibilities and the risks faced by a director in connection with each of these. All the adviser knew was that since his money was in the fund, his interests and those of his clients were aligned. Disclosure about a potential amorphous conflict under those circumstances would seem unnecessary and too attenuated to entertain.

Of course, should the regulator’s concerns be realized and an actual conflict arise, there would be plenty of ways for the adviser to handle it at that later date. For example, after having purchased preferred stock for the fund and having gained effective control of the company, the adviser could abstain from participating in board deliberations concerning a sale of the company. If a sale price under consideration by the board appeared too low and thus unfair to the interests of the common stockholders, the adviser could resign from the board. Because there are ways to handle conflicts once these arise, speculation in advance about the myriad of possible scenarios has never been required, nor is it the accepted standard of practice in drafting disclosure.

Further, the fact that the adviser served on the company’s board was disclosed in advance in quarterly newsletters to the investors, on calls with the investors and in the Form ADV that the adviser had filed with the regulator. The adviser did err by not sending his investors a copy of the Form ADV after it was amended to include his latest board appointment, but that is a Brochure Rule violation, and not a breach of fiduciary duties. Now a Brochure Rule violation can be a serious matter if potential new investors in the fund receive inadequate disclosure, but that wasn’t the case here. No new investors joined the fund after the Form ADV was amended. Further, as stated above, once the investors learned about the purchase of the preferred stock, they had every opportunity to ask to get out of the fund or ask that the investment in the company be placed in a side pocket. However, the investors across the board were enthused about the investment in the company and wanted to stay in it. It never occurred to the adviser that a regulator would second guess his decision to disclose immediately following the purchase of the preferred stock and instead insist that not disclosing the possibility of such an investment in advance was a breach of fiduciary duties subject to an enforcement action.

Why on earth was the regulator worried in the first place? The regulator hasn’t been charged with protecting the common stockholders of the company. Their job is to protect the investors of the fund. The fund’s investors saw the adviser’s board position as an asset that far exceeded any potential liabilies. That is what investing is all about.

In the Bramble Bush, Karl Llewellyn wrote that what judges, lawyers, regulators and law enforcement officers “do about disputes is, to my mind, the law itself.” And of course, he was correct. The fact that the law and precedent was with my client was of little significance unless he was willing to litigate, an expensive and risky process.

I wrote this post so that readers might appreciate what goes through a lawyer’s mind when you ask for legal advice. What will a regulator do if I enter into the proposed transaction, you might ask? Well, we can tell you what the law says, but, honestly, the real answer depends on whether the regulator assigns your matter to an obtuse, uncommunicative and misinformed staff member, whom the regulator then obstinately supports. As your lawyer, there is no way for me to know that in advance.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

One year later than required by the JOBS Act, the SEC enacted a rule on July 10, 2013 to lift the ban on general solicitation and advertising in Rule 506 offerings to accredited investors. The SEC added a new subsection (c) to existing Rule 506 that permits general solicitation and advertising in connection with an offering of securities if the issuer takes reasonable steps to verify that all the purchasers of the securities are accredited investors. The old rule is now denoted subsection (b) and requires that the issuer forms a reasonable belief as to the status of the accredited investors, and, in any case, still permits up to 35 non-accredited investors. (Of course your lawyer still won’t let any non-accredited investors into the deal because of onerous disclosure requirements under Rule 502.)

According to the SEC: “whether the steps taken [to verify accreditation] are ‘reasonable’ would be an objective determination by the issuer (or those acting on its behalf), in the context of the particular facts and circumstances of each purchaser and transaction.” This is the same standard that the SEC put forth in the proposing release. However, in the rule, the SEC also included a list of specific and detailed non-exclusive, non-mandatory methods for verifying accredited investor status of purchasers who are natural persons.

Satisfying the Income Requirement. The issuer might review tax forms, including W-2s, 1099s, K-1s, and 1040s, that report the purchaser’s income for the two most recent years. The SEC also asks for a written representation from the purchaser (and the purchaser’s spouse) that the purchaser has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.

Satisfying the Net Worth Requirement. The issuer might review bank, brokerage and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports. To ascertain liabilities, the issuer might look to reports from credit agencies. The reports would need to be dated within the prior three months. Further, the issuer would need to obtain a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed.

Third Party Confirmation. The issuer might (instead) ask for a written confirmation from certain third parties, including broker-dealers, SEC-registered investment advisers, attorneys and certified public accountants, that such third party has taken reasonable steps within the prior three months to verify that the purchaser is an accredited investor based on either the income requirement or the net worth requirement.

Grandfathering of Existing Investors. In follow-on rounds, the investors who purchased securities in a Rule 506 offering as an accredited investor prior to the effective date of the new rule, could simply certify that they remain qualified as accredited investors.

High Minimum Investment Requirements. According to the SEC: “if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.”

If none of this is required, should you care? Well, think of what might happen if you (as a founder of a start-up company) end up having some non-accredited investors in a 506(c) transaction. Now add to this that you could have spotted and excluded them by using heightened (or, for that matter, any) verification procedures. Imagine, also, that things are a bit slow at your office and some of these non-accredited investors become disgruntled and call your state regulator to find out what remedies they might have. In the past, the state regulator would have told them that the state was pre-empted from taking action by the 506 filing. Or if the issuer had been careless enough to miss the required filing date of the Form D, the state might have told the issuer to find another private placement exemption. But now state securities enforcement would have a real live non-accredited investor, and could ask pointed questions. Also, what other private placement exemption would the offering fit under, now that you have gone public? So the state might bring an enforcement action. Then SEC enforcement might pile on and ask you to withdraw the offering or file a registration statement, which of course you could never afford to do. Then there is the possibility of a civil claim by the disgruntled investors against you personally, seeking rescission and an 8% return on their investment (See: RCW 21.20.430). Seen from a legal perspective, the SEC’s non-exclusive, non-mandatory verification procedures are not merely suggestions.

Most accredited investors traditionally qualify by claiming to have net worth in excess of $1 million. Well it is relatively easy to verify assets, but how does one account for liabilities? How would a credit agency know about personal guarantees on a business line of credit or on an office lease? And how exactly does one spot the potential investor who is a bit short but draws on his home equity credit line to get some cash to beef up his assets? (If he does so within 60 days of investing, that cash is not supposed to be included in net worth, according the SEC.)

Investors are understandably reluctant to share their personal finances with a start-up in which they are investing, so third-party verification is, in theory, a good idea. But who is going to pay for that? And, while I can’t speak for CPAs and investment bankers, as a lawyer I am not too keen on getting into this business. What can I say about liabilities that my client has not told me about?

So the effect of these suggested verification procedures might well be to move investors toward income verification. And this might work nicely for investors with salaries. But a significant portion of investors in private placements live off of capital gains or accumulated savings. These folks might have a lot of income one year, but very low income the next.

We are rapidly leaving behind a private placement market in which investors were considered accredited based on their own word. This market worked well for over 30 years. Why did we need to add the complications associated with verification?

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

In a post last year, I discussed that up till now Congress had neglected to provide an exemption from registration for resales of stock in a private corporation by a founder or other person affiliated with (or in control of) that corporation. Of course that didn’t stop these resales from taking place, and in the inevitably ensuing litigation judges crafted an exemption referred to as “Section 4(1½)”. In these cases, courts decided that founders or other affiliates are entitled to resell under Section 4(1) as long as they ensure that the sales take the form of 4(2) private placements, including the disclosure that an investor would expect if he bought directly from the issuer.

[Note: In the 1990s, various subsections of the Securities Act were re-designated to ensure consistency in numbering throughout the statute. As a result, Section 4(1) is now referred to as Section 4(a)(1) and Section 4(2) is now referred to as Section 4(a)(2). Since we will be talking about statutes and not old court cases, I’m switching to the current nomenclature for the remainder of this post.]

In my earlier post I asked what happens if the issuer doesn’t cooperate with the affiliate or founder who wants to sell some of his stock. Perhaps the board decides that they want to raise money for the corporation, and the founder ought to wait a few more years before he tries to sell stock. Fine and good, but if the founder nevertheless finds an interested buyer, how can he pull a disclosure packet together without help from management?

On December 4, 2015, a new provision was added to the Securities Act that may help. Under Section 4(a)(7) resales of private company securities that meet certain requirements are exempt from registration under the Securities Act and pre-empt the registration or qualification requirements of state “blue-sky” law. The securities will remain restricted, which means that the buyer can’t sell them to another person without reference to an exemption. Presumably, however, the buyer won’t be affiliated with the issuer and thus can readily sell under Section 4(a)(1),Rule 144 or even Section 4(a)(7) itself.

Under Section 4(a)(7), the seller may not publicly solicit for buyers and he can only sell to accredited investors. The seller will have to provide the buyer with certain information, including the issuer’s most recent balance sheet and income statement. If the seller is a control person, he will also need to certify that he has no reasonable grounds to believe the issuer is in violation of US securities law.

In many ways, Section 4(a)(7) will be easier to comply with than Section 4(a)(1) and 4(a)(2). Because the seller is not charged with adhering to the standards of a Section 4(a)(2) private placement, he will not be required to limit the number of offerees. Because the seller is not charged with adhering to the standards of a Section 4(a)(1) resale, he will not have to worry about exercising reasonable care that the buyers are acquiring for investment purposes and not acting as brokers or underwriters for others to buy from them. In addition, Section 4(a)(1) is harder to comply with because it does not pre-empt state securities laws and the parties will need to find a state law exemption in the buyer’s state.

Therefore, I believe that this new exemption will be quite useful to founders and other affiliates seeking to resell stock and that Section 4(a)(7) may well all but replace the judicially crafted doctrine of “Section 4(1½)”. Further, there is reason to use Section 4(a)(7) rather Section 4(a)(1) in sales by persons not affiliated or no longer affiliated with the issuer. Because these sellers are not affiliated with the issuer, they won’t have to certify that they have no reasonable grounds to believe the issuer is in violation of US securities law. If these non-affiliated sellers have access to current financial reports (and many issuers are contractually required to share such information with their shareholders), complying with Section 4(a)(7) in a sale to an accredited investor would seem easier than selling under Section 4(a)(1). Under Section 4(a)(1), the parties would need to establish the investment intent by the buyer and find an exemption under state law (which might involve the seller having to retain counsel in the state of the buyer). Under Section 4(a)(7), state “blue sky” laws are pre-empted. Further, many of the buyers of start-up corporation stock are Venture Capital firms, and these are of course accredited.

Section 4(a)(7) may have a bright future indeed.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

Last year I discussed the legal requirements under Section 4(1) that an investor would have to follow in a sale of private company stock to another investor. I also wrote a post on the judicial construct referred to as Section 4(1½) under which founders and other affiliates can sell some of their control shares to an investor if they follow the practices the issuer would use in a 4(2) private placement. This is all fine and good if the seller can find a buyer on his own and the two of them can come to mutually satisfactory terms. However, what if the seller either can’t or doesn’t want to make the effort to find a buyer. Can that seller just go to a broker?

Rule 144 of the Securities Act of 1933 is a safe harbor for a public resale of restricted or control shares using a broker under Section 4(a)(1). Of course, this means that there is already a market for the stock, and that usually means that the issuer is an SEC reporting company and the seller is holding restricted shares. Shares are restricted if they have not been registered, even though the company itself may be registered and trade on a stock exchange, such as NYSE or NASDAQ. In addition, some unregistered companies have quoted stock prices and sufficient information may be publicly available for over-the-counter trading to be permitted.

If the issuer is a reporting company, and the securities have been held for more than one year, shares can be resold freely under Rule 144. If the securities have been held for more than six months but less than one year, they may be resold freely so long as there is current public information available about the issuer. If the issuer is not a reporting company, the securities may not be resold until they have been held for one year, after which time they may be freely resold if they are not control shares.

Rule 144 cannot be used to sell control shares if the Company is not a reporting company. It is theoretically possible for an issuer to meet that requirement simply by making public the required information. As a practical matter, it rarely is met other than by companies who are required to file reports with the SEC, usually as a result of having securities registered under the Exchange Act.

If the Company is a reporting company, holders of control shares (that is, affiliates of the issuer) may not sell more than a certain amount during any three-month period. That amount may not exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144. Control shares in over-the-counter stocks, including those quoted on OTC Markets can only be sold using the 1% measurement.

If the seller holds stock certificates with restrictive legends on them, the broker will need to contact the issuer’s transfer agent to get the legends removed so that the stock can be traded in book entry form as if the shares were registered. This will involve the seller completing a form in which the seller represents that he is or is not an affiliate and that the appropriate holding periods have run, among other things. If the seller is an affiliate, he will need a securities lawyer to give a formal legal opinion and help comply with insider trading laws, volume restrictions and filing a Form 144. If the seller is not an affiliate, the transfer agent may still require a legal opinion. However, the issuer may be set up to provide support to the selling stockholder so that he does not need to retain his own attorney.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

As a securities lawyer, I like option plans. Options awarded to employees, directors, consultants and advisors pursuant to a plan are exempt from registration under Rule 701 of the Securities Act of 1933, as amended. Each state has a corresponding exemption from its Blue Sky laws; in Washington that exemption is found in RCW 21.20.310(10).

An option plan requires certain formalities. The plan must specify the total number of shares that may be issued and the persons who are eligible to receive the options. The plan must be approved by the shareholders within 12 months before or after plan adoption.

The options awarded under the plan can be either Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs). ISOs may be granted only to employees; grants to non-employee directors or independent contractors are not permitted. The holder must exercise the option while employed or no later than three months after termination of employment. In contrast, NSOs may be awarded to any person covered by the plan, and there is no required limit on the exercise period, although plans often impose one.

Of course, NSOs are the same thing as warrants that are awarded without reference to a plan. Many start-ups that aren’t going to be awarding ISOs opt for warrants, but that leaves the securities law issues unresolved. Is the award of the warrant a private placement under Section 4(a)(2) of the Securities Act? Probably, in most cases. However, for the same reasons that offerings to investors are made in reliance on Rule 506 of Regulation D, no one (and certainly no securities lawyer) can tell you exactly what a private placement is, which is why I prefer awarding NSOs under an option plan.

Given the restrictions on ISOs, what’s the attraction? Well there were tax advantages for ISOs when they were first introduced in the tax code. If the employee holds ISOs, he does not have to pay ordinary income tax on the difference between the exercise price of the option and the fair market value of the shares issued (the so-called “spread”) at the time of exercise. Instead, if the shares are held for one year from the date of exercise and two years from the date of grant, then the profit made on sale of the shares is taxed as long-term capital gain. Long-term capital gains in the U.S. are taxed at 20%, while ordinary income may be taxed as high as 39.6%, depending on the employee’s tax bracket.If the option is an NSO, the employee will owe tax on the spread at ordinary income tax rates when the option is exercised. But because the employee isn’t counting on capital gains tax treatment on an NSO, he doesn’t have to hold the stock for a year and risk that the price drops and his profits erode.

In general, capital gains are not all that they are cracked up to be. From the combined perspective of the start-up corporation and the executive, salary and bonus compensation is more tax efficient than converting option compensation into capital gains. That is because the corporation can deduct compensation expense from its taxes. This is true of the spread on an NSO at the time of exercise. There are no tax deductions for the corporation associated with ISOs.

In 1982, the U.S. introduced the Alternative Minimum Tax (AMT). Spreads on ISOs, but not NSOs, are subject to this tax. The AMT has a high exemption level. For single people, it’s $53,900 in 2016 and starts phasing out at $119,700. That means the AMT is a tax on relatively wealthy people, but almost all executives who are awarded options presumably fall into that category. The AMT rate is steep, 26% to 28% depending on income. That’s often more than enough to offset any tax advantages that ISOs were intended to achieve. After all, ordinary tax rates are at most 19.6% higher than capital gains rates.

Further, for public companies where there is a market for the stock and the stock price may be relatively stable, vested options that are in-the-money can be readily converted to profits, even if the employee or former employee holds ISOs. But for employees of a start-up corporation, the requirement that options be exercised within three months of leaving is toxic. There is little chance that a start-up not already in play is going to have a liquidity event in three months, so the option holder may have to exercise and take a huge gamble that the corporation will succeed years later and the stock he now holds (and for which he had to pay the cash exercise price and a whopping AMT amount) will someday be worth more than he paid.

What’s the attraction of Incentive Stock Options? Beats me.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

The basic rule of securities laws is that absent an exemption, securities may not be sold without registration. Since registration is often financially infeasible, holders of stock in start-up companies looking for some cash flow from their valuable but illiquid asset must ensure that any sales fit under an exemption. This is an issue of both federal and state law, as the sale must comply with both.

Under federal law, sales of stock from one investor to another are usually exempt from registration. The relevant statute is Section 4(a)(1) of the Securities Act of 1933, as amended. That section states that sales by anyone other than an issuer or an underwriter are exempt.

Securities lawyers spend a good many hours in their career over the definition of “underwriter” found in Section 2(a)(11) of the Securities Act. This is because an underwriter is not just a Wall Street bank that agrees to buy a company’s stock for its own account if it can’t sell all of it in a registered public offering. The term includes anyone who buys the stock with the intent to offer the stock publicly.

Section 4(a)(1) covers both private and public resales. Rule 144 is a safe harbor that protects against being deemed an underwriter in a public resale by a broker for the account of an investor. That’s a topic for another day; this posting is only about a private resale from one investor to another not involving a broker.

Private resales, on the other hand, are much more like private placements by issuers. Section 4(a)(2) of the Securities Act exempts private placements by the issuer from registration. What is or isn’t a private placement is a subject that securities lawyers discuss regularly with their clients, but making sure that the buyer is not an underwriter plays a big part in this. There are three basic steps the issuers undertake to make sure the sale is truly a private placement. First, the issuer places restrictive legends on the stock certificates (or better yet, issues uncertificated stock). Second, the issuer takes steps to ensure that the buyer has investment intent and that the buyer is contractually bound not to distribute the stock. Third, the stock is subject to a shareholders’ agreement which contains right of first refusal that would allow the issuer to repurchase the stock from the buyer were the buyer to offer to resell the stock.

For investors, the main burden after finding another investor and agreeing on price will be compliance with the shareholders' agreement. In addition, the issuer will often request a legal opinion from counsel of the seller. Securities lawyers like me will review the proposed transaction to ensure that it falls under Section 4(a)(1). The steps here are similar to those in a private placement by the issuer, as the investor too will want to ensure that the buyer cannot be deemed an underwriter. In addition, counsel will look into the relevant state exemption from registration or qualification with the securities regulator in the buyer’s state. In Washington, that’s often the isolated transaction exemption found in RCW 21.20.320(1). A number of active investors on the West Coast are private equity funds located in California. Under California law, non-issuer transactions need to be qualified by the Commissioner of Corporations under Section 25130 of the California Corporations Code. However, Section 25104(a) exempts most sales by the owner for his own account.

Sometimes the person trying to sell stock is not an investor. Instead, the seller is one of the founders of the company. Here, Section 4(a)(1) does not readily apply because the law treats affiliates of the issuer as if they were the issuer themselves. But that’s a topic for another day.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

In a recent post, I discussed the legal requirements that an investor would have to follow in a sale of stock in a private company to another investor. Regrettably, this doesn’t work for shareholders who are founders or otherwise affiliated with the issuer of the stock. While there is no bright line test for affiliation, a person who would be an insider if the company were public is presumed to be an affiliate of a private company. Insiders of public companies are persons who have to report their trades under Section 16 of the Securities Exchange Act of 1934, as amended. This group consists of directors, executive officers and shareholders who own 10% or more of the issuer.

In my earlier post I discussed the definition of “underwriter” found in Section 2(a)(11) of the Securities Act of 1933, as amended. Underwriters are persons who purchase securities from an issuer with the intent of selling them publicly either directly or through one or more intermediaries. For the purposes of this definition, affiliates are treated as if they were the issuer themselves. That implies that an investor can’t buy stock from an affiliate without worrying about whether someone down the chain from the investor has the intent to sell the stock publicly. That in turn implies, that Section 4(1) is not readily available for a sale by an affiliate of the issuer.

A founder or other affiliate also can’t readily use Section 4(2) to sell stock. That section only exempts private placements by the issuer itself. And as we all know, issuers overwhelmingly avail themselves of the safe harbor provided by Rule 506 of Regulation D to conduct such private placements. But that rule too only applies to sales by the issuer itself. It’s almost as if Congress and the SEC forgot about private resales by affiliates.

Luckily, there are sources of law other than statutes and regulations. In one of the relevant court cases, Ackerberg v. Johnson 892 F.2d 1328 (1989), the chairman of the board had more shares than he wanted and he resold some to a new investor to make some money. The court ultimately held that there was no public offering because the chairman had provided the buyer with sufficient disclosures about the company. Thus, the chairman was found not to be an underwriter, and the transaction was entitled to the exemption provided in Section 4(1).

The rule that emerged is that a founder or other affiliate is entitled to resell under Section 4(1) as long as he ensures that the sale takes the form of a 4(2) private placement, including the disclosure that an investor would expect if he bought directly from the issuer. In the secondary literature, such a transaction is referred to as falling under Section 4(1½). It really isn’t a 4(2) private placement, nor is it a 4(1) resale. It falls somewhere in between.

Of course, the affiliate would also need to follow all the other steps that I discussed in my recent post on this topic. As to disclosure, that customarily takes the form of an offering memorandum, but a good investor slide deck, a set of comprehensive risk factors and recent financial statements might do as well.

What if the issuer won’t cooperate with the founder? How is the founder supposed to pull a disclosure packet together without help from the company? Well if the founder truly can’t get the company to do what he wants, then he probably isn’t in control of the company, and if he’s not in control of the company, he isn’t really an affiliate. Good luck convincing counsel for the buyer of that.

Note: Until recently, Section 4(a)(1) of the Securities Act was referred to as Section 4(1). Likewise, Section 4(a)(2) was referred to as Section 4(2). I’m using the old nomenclature here so that the term “Section 4(1½)” can be understood in context.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

In my last post on this topic, I discussed that hedge funds need to make sure that ownership of the fund by benefit plan investors is not significant, which is set at 25% or more of the fund’s ownership by the Department of Labor in 29 CFR 2510.3-101(f). That regulation defines benefit plan investors to include any employee benefit plan as defined by ERISA in Section 3 (29 USC § 1003) as well as any plan described in Section 4975(e)(1) of the Internal Revenue Code.

The post then concludes that without an ERISA trigger, the fund does not need to worry about the various ERISA regulations that affect plan assets, even if IRA’s make up 25% or more of the fund’s ownership.

IRC Section 4975 prohibits transactions (by taxing them) that directly or indirectly benefit a disqualified person, and not the plan. Disqualified persons include service providers of the fund, such as custodians, auditors and brokers.

Because the DOL regulations drag in the IRC and the IRC treats IRAs as plans, if IRA’s make up 25% or more of a fund’s ownership, that fund is going to want to find an exemption from the provisions of Section 4975. The fund needs an exemption, because otherwise service providers won’t do business with it.

Subsection 4975(d)(20) provides such an exemption. It states that transactions between the fund and the service provider are exempt so long as the fund receives no less, nor pays no more, than adequate consideration for the service.

Please consult a CPA, ERISA attorney or tax attorney if service providers push back at you when you disclose (in response to their questionnaire) that the fund is a plan asset for purposes of the IRC. In most instances, if you are running a small hedge fund that trades equities or options on an exchange, the service provider exemption should be sufficient.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

While Washington Initiative 502 establishes a licensing system for marijuana producers, processors, and retailers, Section 69.50.101 of the Revised Code of Washington makes clear that cannabis is still classified as a Schedule I drug under the U.S. Controlled Substances Act (“CSA”). Any involvement with the Company is subject to federal prosecution. If the Company is successful in implementing our Business Plan, we will sell many thousands of keys (kilograms) of marijuana in the first few years following this Offering. First-time, non-violent offenders convicted of trafficking in Schedule I drugs can be sentenced to life in prison when multiple sales are prosecuted in one proceeding (please see Sections 841 of the CSA). Your participation as an investor could be deemed to constitute trafficking under well-established principles of criminal law. Furthermore, your entire investment, and any profits derived from your investment, is and are subject to forfeiture “to the United States, irrespective of any provision of State law” (Section 853 of the CSA). In addition, each of the founders and directors of this Company could be sentenced to life in prison under Section 848 of the CSA for serving as “the principal administrator, organizer, or leader” of a “continuing criminal enterprise.” Incarceration of the management team of the Company, and the forfeiture of the Company’s property, could have material adverse (indeed catastrophic) consequences for the Company. In addition to the inability of the Company to use banks and banking services, rent facilities or deduct its legitimate business expenses for federal tax purposes, all of which are discussed elsewhere in the Offering Documents, the protective benefits of federal bankruptcy might not be available if the Company were found to be a continuing criminal enterprise. You are strongly urged to consult with your own attorney about the illegality of participating in this Offering. The Securities Counsel for the Company, who drafted this Risk Factor and the other Offering Documents, might be subject to federal prosecution. He is not available to respond to your inquiries.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting is a somewhat whimsical version of a risk factor that should (but might not) be found in the offering documents prepared in connection with a private placement of securities to potential investors in the Company. The Company’s business plan involves distributing marijuana in Washington State. The Company is a purely fictitious. This posting does not constitute legal advice.

The Employee Retirement Income Security Act of 1974 (ERISA) is a complex mega-statute administered by the U.S. Department of Labor (DOL) that regulates employee benefit plans. Hedge funds generally need to avoid being subject to ERISA, as the regulations are cumbersome and impose numerous restrictions, many of which cannot be met without the hedge fund manager qualifying as an ERISA fiduciary. This, in turn, requires that the fund manager be registered as an investment adviser with the SEC, which, in turn, requires that the fund manager have in excess of $100 million under management. This obviously is not realistic for most hedge fund managers who are just starting out.

To avoid falling under ERISA, hedge funds need to make sure that ownership of the fund by benefit plan investors is not significant, which is set at 25% or more of the fund’s ownership by DOL in 29 CFR 2510.3-101(f). That regulation defines benefit plan investors to include any employee benefit plan as defined by ERISA in Section 3 (29 USC § 1003) as well as any plan described in Section 4975(e)(1) of the Internal Revenue Code. (The IRC is another complex mega-statute, which ERISA borrows from liberally, making it all the more fiendish to work with.) The referenced IRC provision problematically draws in IRAs as one of the types of plans to worry about.

This is about when my phone rings and a client says that he’s been doing some reading and it appears he is not allowed to take any IRA money, or at least no more than 25% of the investors’ funds can be from IRAs.

Part of the problem here is just the unintended consequences of the ubiquitous internet, which allows anyone to read anything, whether in or out of context. Here the plan asset regulations are being read out of context. Regulations are triggered by statutes. You don’t need to read regulations on employee safety, for example, if you don’t have any employees. But if you do start reading them, you probably will find numerous potential violations. DOL is part of the executive branch of the federal government, and it can only regulate where Congress has delegated authority to DOL to do so. That authority is found in ERISA, and Section 3 of that statute says that ERISA’s coverage includes employee benefit plans established or maintained by any employer or any employee organization (such as an union). It doesn’t say anything about hedge funds. In the absence of a statutory trigger, the DOL's plan asset regulations can't drag you into ERISA.

As a practical matter this means that if you’re setting up a hedge fund, and one of your clients is a pension fund, you need to pay attention to ERISA. In that case, you also need to count IRAs towards the 25% threshold. However, if none of your investors are pension funds, then (as far as ERISA is concerned) you ought to be able to take as much IRA money as your individual clients want to invest, whether that makes up 25% or more of the total investments in your fund.

But we can't forget the IRC. In a future post, I plan to discuss Section 4975, which imposes a tax on prohibited transactions that is triggered by plan assets.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

New SEC Rule 506(d) disqualifies securities offerings from reliance on the private placement exemption of Rule 506 of the Securities Act if certain felons and other “bad actors” are involved in the offering. The persons covered by the rule include the company itself, any placement agent or other compensated solicitor, and each of their respective directors, executive officers, or any officer involved in the private placement, as well as holders of 20 percent of the voting securities of the company. The disqualification also covers the general partners of a private fund, and its principals and officers.

Such persons would become bad actors if after September 23, 2013, they became subject to (among other offenses):

criminal convictions in connection with the sale of securities or making false statements to the SEC;

court orders, judgments or decrees in connection with the purchase or sale of securities or in connection with the business of a broker/dealer or investment advisor;

final orders of state or federal bank, insurance or securities regulators, which bar the person from associating with an entity regulated by such commission or otherwise engage in the business of securities, insurance or banking;

disciplinary orders of the SEC that suspend or revoke such person’s registration as a broker/dealer or investment adviser, limits such person’s activities or operations, bars such person from association with any entity or from participating in an offering of penny stock, or prohibits future violations of anti-fraud rules and laws.

Each of these bad acts is associated with look-back periods, generally 5 or 10 years. Bad acts that occur before the period began would not bar the issuer from relying on Rule 506. However, any company engaged in a private placement is required to furnish each potential investor a written description of any matters that would have triggered disqualification under the rule had the events occurred before September 23, 2013.

A company that is unaware of a covered person’s disqualification would not be barred from relying on Rule 506 if it is able to establish that it has exercised reasonable care in inquiring whether any disqualifications exist. That last point is the important one. You can be sure that we securities lawyers will now have a new questionnaire for companies and their officers and others to fill out.

The bad actor rule was enacted as required by the Dodd-Frank Act. State regulators have been complaining for years that because they are pre-empted from reviewing Rule 506 transactions, fraudsters have been filing Form Ds and checking the 506 box with impunity as part of their nefarious schemes to steal from the public. “Of course this deal is on the up and up; we even filed it with the SEC”, was commonly believed to be what investors were told. Now no one thinks crooks are going to pack it in because of this new rule. And asking the rest of us to spend time and effort checking whether anyone involved in a real deal has an SEC rap sheet will be intrusive and expensive. Certainly, a deal which is entirely fraudulent could close anyway, since there is nothing here that allows state regulators to hold the process up for review; they are still pre-empted. But the bad actor rule will be effective against small broker dealers which, while listed at FINRA BrokerCheck®,will now have real liability for not disclosing their disqualification. As to the larger banks, I’m sure that when they plead to a bad act going forward, they will get a pass. Read Rule 506(d)(2)(iii), which states that “[disqualification] shall not apply . . . if, before the relevant sale, the court or regulatory authority that entered the relevant order . . . advises in writing (whether contained in the relevant . . . order . . . or separately to the [SEC]) that disqualification . . . should not arise as a consequence of such order . . .” I’m looking forward to reading the order settling the federal government’s charges against JP Morgan in the Madoff Case, which was of course a fraud conducted through 506 private placements. Anyone out there think that the order won’t have a reference to Rule 506(d)(2)(iii)? If so, call me, because I may have a bridge to sell you.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

Venture capitalists over time have turned preferred stock into an art form. Not only do VCs use preferences for down-side protection, they also demand features that ensure that they get a sizeable return on their investment before the founders see one red cent. One of these features is the liquidation preference, for which VCs may ask (and get) a multiple of their investment no matter how short the time period is until they push to sell your company. The other feature is participation. In participating preferred stock, the VC receives a liquidation preference and in addition participates as if he had converted to common stock. Of course, participating preferred never converts to common, because the investor always gets more by not converting. That makes participating preferred a toxic instrument that, like the dead albatross in Coleridge’s “Rhyme of the Ancient Mariner”, hangs around the founder’s neck forever.

I recall the first time a client successfully sold a venture-financed company in a transaction in which I served as counsel. My client made a small fortune on the sale of his company, but was somewhat irked that the VC made a large one. I had to explain to the founder that he not only had to pay the VC a fair share of his company, but he also had to help the VC recoup losses from all the failed investments the VC had made.

So venture capital is an expensive (but necessary) part of the life cycle of many start-up companies. And that means that angel investors, knowing that VCs may be investing in subsequent rounds, need to help founders with a smooth transition. If a start-up anticipates multiple angel rounds, the first of these may be in the form of a convertible note for which the investor receives the same security as in the subsequent round, but at a discount. However, if the subsequent round is a venture capital round, the VC will object to the angels piggy-backing on the VC’s 2X liquidation preference and full participation with the common (not to mention that 30% discount.) In considering preferred stock, the company and the angels therefore have an incentive to ensure that it does not become toxic.

It is not hard to compare the impact of accrued dividends to liquidation preferences. For example, a 2X liquidation preference is equivalent to a 25% non-compounded dividend if there is an exit in four years. A mandatory or so-called “cumulative” dividend can therefore be effectively deployed in angel deals. The dividend is rarely paid and instead accrues to the liquidation preference. The stock pays no liquidation preference upon conversion. Therefore, the dividend only comes into play if the liquidation preference exceeds payment that the common stock would receive upon a liquidity event. In that case, the angel investor would not convert and instead receive the preference.

Were a company to offer a dividend of 10%, for example, angel investors would have an incentive to sign on early and not wait to come in at the end of the round. A dividend at a fair rate whose true cost varies to reflect the time value of money makes sense for all participants. In an angel round, where investors may enter over an extended period, a new series of preferred stock can be issued on each closing date. If the dividend does not compound, the company can close on the investment any day that an angel wants to write a check.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

As part of the JOBS Act of 2012, Congress passed the ‘‘Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012’’ (or “Crowdfund Act”). But it won’t be available until the SEC promulgates rules making the provisions operational and clarifying what some of the legislative language means in practice. Here is what we know to date about how crowdfunding will work for issuers (it also has requirements for the so-called “funding portals”, which we won’t discuss today):

Issuer Volume Limitation. The total amount of securities an issuer may sell to all investors during the 12-month period immediately preceding the crowfunding transaction, including those securities sold in the crowdfunding transaction, may not exceed $1 million.

Investor Volume Limitation. The total amount of securities an issuer may sell to any individual investor purchasing securities in a crowdfunding transaction in any 12-month period, including both the crowdfunding transaction and all other transactions during the period is:

The greater of $2,000 or 5% of annual income or net worth, if the annual income or net worth of the investor is less than $100,000; or

10% of annual income or net worth, up to a maximum of $100,000, if the annual income or net worth of the investor is greater than $100,000.

Required Funding Portals. Crowdfunding transactions must be conducted through a broker or a “funding portal” that has registered with the SEC. The portals will have significant responsibility for preventing issuer fraud and for protecting investors. These responsibilities include educating and screening potential investors, taking appropriate action to reduce the risk of fraudulent transactions (including checking the background of the issuer and its insiders), providing disclosure to the SEC, ensuring that the issuer does not receive any funding until the target offering amount has been raised, and taking steps to ensure that investors do not purchase more than their annual limit of securities of the issuer.

Advertising. Issuers may only use advertisements that direct potential investors to the broker or funding portal. In effect, issuers in crowdfunding transactions will have much greater latitude to sell securities to strangers than they do in traditional private placements, which prohibit “general solicitation” of investors. Of course, the JOBS Act also called for the SEC to introduce a rule to eliminate the ban on advertising and general solicitation in Regulation D -- Rule 506 transactions where all investors are accredited. This is by far the most exciting feature of the JOBS Act in the area of private placements. But it also has the potential for rampant fraud.

Target Offering Size. Issuers must disclose the amount of money they intend to raise. Investors will be able to rescind their commitments if the issuer does not reach this target

Exchange Act Relief. The Crowdfund Act provides that the investors who join the issuer pursuant to the exemption will not count toward the reporting company shareholder threshold. In the absence of this relief, crowdfunded companies could easily end up with so many shareholders (now 2,000 accredited investors or 500 non-accredited investors) that they would be subject to public company reporting requirements.

Blue Sky Relief. Securities sold in crowdfunding transactions will be exempt from the substantive registration and qualification requirements of state securities or “blue sky” laws, just as Rule 506 securities are now.

Restrictions on Transfer. Like other privately placed securities, securities sold in crowdfunding transactions will not be immediately freely transferrable. Subject to limited exceptions, crowdfunding securities must generally be held for one year before they can be transferred without restriction

Issuer Disclosure Requirements. Unlike under Rule 506, the Crowdfund Act does require issuers provide substantial disclosure to potential investors and ongoing financial disclosure on at least an annual basis. The information that must be disclosed includes:

the issuer’s directors, officers, and each person holding more than 20% of its shares;

o offerings over $100,000 but under $500,000 - financial statements reviewed by an independent public accountant; and

o offerings over $500,000 - audited financial statements;

use of proceeds and target offering amount; and

information about the offered securities and the issuer’s other securities, includingdisclosure about the rights of crowdfunding investors relative to the issuer’s other investors.

As you will have gathered by now, crowdfunding transactions will require both the advice of lawyers and accountants. But the start-up community had hoped for a way of raising money that would avoid complex legal and financial compliance and regulation. Well they did not get what they wanted, and chances are that once the SEC rules are promulgated, the process will be even more arcane and less straight-forward.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

There is no legal reason to issue stock certificates in most jurisdictions. Many corporations still issue them, but that is out of habit and custom. When is the last time you bought shares in a public company and asked your broker for a stock certificate? The answer is probably never, and that is because public companies in the US long ago deposited all their stock certificates with a predecessor of the Depositary Trust & Clearing Corporation in New York, and transfers of stock are handled as book entries.

Even this system is out dated. Most jurisdictions permit stock to be issued without ever creating a certificate. In Washington State, RCW 23B.06.260 permits the board of directors to approve issuing shares without certificates. In that case, each shareholder is instead sent a record containing the information that would otherwise be on the certificate.

I often advise clients to set up stock registers in spreadsheets that contain all the information required by RCW 23B.06.250. Each spreadsheet has a header with a date, the corporation’s name and the class of stock covered. The footer consists of a stock legend that states that the shares are not registered and therefore may not be transferred by law except pursuant to an exemption and that the shares are also subject to additional transfer restrictions and other rights and obligations under a shareholders’ agreement. In the case of preferred stock, the legend also contains a reference to the articles of designation that define the rights, preferences and limitations of the series.

Each entry or spread sheet row in the stock register lists the date of issuance, to whom the shares were issued, and the number of shares so issued.

Each time the spread sheet is updated, the original is signed by two authorized officers of the corporation and then scanned and saved as a PDF file that can be emailed to each shareholder. Once emailed, the statutory requirement of sending a record has been satisfied. Furthermore, the corporation is well on its way to complying with RCW 23B.07.200, which requires that “after fixing a record date for a meeting, a corporation shall prepare an alphabetical list of the names of all its shareholders on the record date who are entitled to notice of a shareholders’ meeting. The list must be arranged by voting group, and within each voting group by class or series of shares, and show the address of and number of shares held by each shareholder.”

Of course a corporation can still use old fashioned stock certificates. But certificates are expensive to produce, often contain errors, get damaged or misplaced and are difficult to collect when the corporation recapitalizes or is merged into another entity. As far as I am concerned, let’s end this practice and stop using stock certificates.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

One of the most hotly debated topics in the start-up community is whether the founders of a new business should incorporate in Delaware or locally. For entrepreneurs located in the Puget Sound Region that would, of course, be right here in Washington State. I used the term “incorporate”, because angel investors are generally not interested in pass-through entities for tax purposes. Choice of entity, another hotly debated issue, is a topic for another day.

The arguments for incorporating in Delaware revolve around the advantages of the depth and predictability of Delaware corporate law and the fact that investors expect to get those advantages. In my experience, the substantive legal advantages are both narrow and esoteric and often don’t apply to start-up corporations. Public companies and their executives have good reason to choose Delaware corporate law, but few of these reasons apply to angel investors. Rather, the discussion with angels tends to focus on valuation, with the investors saying “if you had only incorporated in Delaware, we might be able to justify the pre-money valuation on your term sheet.”

While this argument may score negotiating points, it is a straw man that lacks any real substance. In an effort to refute the argument or, perhaps, out of concern that a mistake has in fact been made, the founders turn to their attorney for a response.

First, let’s look at the situation practically. Angels tend to invest locally so that they can meet with the founders of the start-up face to face. Therefore, choosing Delaware law will not help a Puget Sound start-up attract investors from other communities. Yes, many lawyers are familiar with Delaware law besides their local law, but an East Coast or even a Bay Area based angel isn’t usually interested in investing in a Seattle start-up.

Second, assuming that your founder’s agreement, the shareholders’ agreement and the investor subscription agreements require disputes to be heard in Seattle, do you really want to be using another state’s law in a Washington court or a Washington arbitration proceeding? Washington lawyers and arbitrators are most comfortable and familiar with applying Washington law. The choice of Washington law will be both cost-effective and predictable. Even worse, if dispute resolution is not restricted to Washington, do you want to be flying to Delaware and hiring Delaware counsel to defend against a lawsuit brought by one of your investors in the Delaware Court of Chancery?

One argument I have heard mentioned is that by incorporating in Delaware or Nevada you can avoid Washington’s Business and Occupation Tax. The reality is that if you do business in Washington, you will owe B&O Tax. That has nothing to do with where you incorporate. Sure, if you incorporate in Delaware, it will take the Washington Department of Revenue a while to catch up with you, but the moment you pay salaries in the Puget Sound Area, DOR has all the nexus it needs to establish taxing authority.

To summarize: (1) the reasons for incorporating in Delaware don’t apply to most start-ups, (2) you can’t escape Washington’s B&O Tax by incorporating in another jurisdiction, (3) the investors who might not want you to incorporate in Washington won’t invest in your company in the first place, and (4) legal risks and costs are much easier to control if you incorporate at home.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

It has been nigh impossible to find out just what was in the amendments that the Senate passed last week. Recall that the original bill included provisions that would have (1) subjected Rule 506 private placements to state regulation and (2) more than doubled the thresholds to qualify accredited investors. However, today the Wall Street Journal reported in an opinion piece that these two provisions were removed from the bill by the amendments that were passed, but that none of us have been able to get to read. While it is never clear in the legislative process when a threat has truly been averted, I would like to thank all my readers who called or wrote their elected representatives to speak up for start-up companies and their angel investors. In an earlier piece, I had asked you to start howling with rage. I think you can stop that now. It may well be time to start celebrating!

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

I don’t write about technology, but every rule has exceptions. If you haven’t looked at Google Voice (“GV”) yet, check it out and sign up for a number or perhaps you can arrange to have a friend send you an invitation to a free account.

GV gives you a local phone number that you give out to your friends and clients. On the GV website, you enter in your work, home and mobile numbers and tell GV which of these and when you want your GV calls forwarded. Then you stop giving out your other phone numbers and everyone just needs to know one number to reach you anywhere and anytime.

GV also has a voicemail feature that transcribes your messages and emails or texts them to you. There are numerous other features that might interest you, but other phone systems have these too.

What makes GV so interesting is that you are not charged for calls or SMS messages within the US. Overseas calls are inexpensive (Europe is currently 3 cents a minute) and if you call an overseas mobile phone the current charge is 19 cents a minute.

The way GV works is that when you place a call, GV calls you and then connects you to the number that you called. That means that you don’t need the phone features of your telephone because you don’t dial the call.

My contacts are on my lap top in MS Outlook and I have a docking station at home and at the office. (When my computer is not connected to the Internet, my contacts are available on my iPhone, so don’t worry about my not being able to call you.) I use Go Contact Sync for free to make sure that my MS Outlook contacts are always synched with my GV contacts. I keep Google Chrome open on my computer (GV runs best on Google’s browser -- go figure) and with two clicks I can place a call to any of my contacts (or I can type in a number if someone is not yet listed as a contact.)

After I click on the number I want to call, GV calls the phone I have set it to (office, home or mobile) and after I pick up, GV connects me to the party with whom I wish to speak. It’s that easy and at no cost to me whatsoever.

Now about that office phone. My landlord provides a high speed internet hook up in my office. I plugged a router into the ethernet outlet so that I can get two IP addresses, one for my computer and one to which I have plugged in a VOIP adapter. I am using a Linksys PAP2-NA which costs around $45. I have a normal desk phone plugged into the adapter. To activate my VOIP phone, I signed up for free with Sipgate. They gave me a phone number that I set up to connect to the IP address of the VOIP adapter and then typed the Sipgate phone number into GV as my office line. I can’t dial a call from my office line since I don’t have a telephone provider, but then I don’t need to because GV calls my office line when I place a call.

I invite your comments to this blog post and look forward to posting another missive in the near future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

One aspect of the bill that has not been widely discussed concerns a problem with the definition of accredited investor in Rule 501. The thresholds for net worth ($1 million) and annual income ($200,000 for singles or $300,000 for couples) were set in 1982 when the CPI stood at around 96.5. Section 412 of the bill instructs the SEC to adjust these thresholds for inflation. In February 2010, the CPI was 216.741. That means that if the bill in enacted into law, to be accredited an investor would now be required to have a net worth of around $2.25 million or annual income (if married) of approximately $675,000. This would, of course, drastically reduce the size of the pool of investors that start-ups could access for "traditional" (accredited investor only) Rule 506 private placements.

I wonder if Section 926 (requiring SEC or state regulatory review) is a decoy and the real goal is to enact Section 412 and hereby adjust thresholds for 28 years of inflation.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

Senator Dodd’s 1328 page bill (Restoring American Financial Stability Act of 2010) contains a provision under Section 926 entitled “Authority of State Regulators over Regulation D Offerings” that would take away the ability of Start-up companies to raise funds without review by the SEC or state securities regulators.

Currently, companies and private funds that want to raise money may do so from “accredited investors” (people with a net worth of $ 1 million or more) without prior review of the offering by any federal or state regulator if the issuer complies with Regulation D’s Rule 506. That Rule forbids advertising and public solicitation, but otherwise does not prescribe the form of offering documents or the content of disclosure. Within 15 days of the first closing, the issuer is required to file a Form D with the SEC and with the securities regulators of the states in which the investors reside.

Rule 506 does not stand in isolation. Other federal and state laws require that a person who sells securities disclose all material facts that impinge on the value of that security. State securities regulators possess numerous civil and criminal remedies to prevent or punish fraud. Injured investors can sue for rescission or damages, statutory interest (at 8% in Washington State) and recovery of attorneys’ fees.

Yet to police potential fraud even earlier in the process, Senator Dodd’ bill proposes to let the SEC decide by rule-making which offerings it would like to review. Those deals that the SEC does not review would be subject to review by state regulators. (This is a gross over-simplification of what the bill actually says, but it will suffice for today.)

The point is that to try to catch a handful of bad guys (who presumably won’t even file Form Ds if this bill becomes law), all the honest companies out there who want to conduct private placements will need to incur significantly greater costs to comply with securities laws.

The timing of this “reform” effort is unbelievable. The world economy is just beginning to climb out of a massive recession and bank credit has virtually dried up. Small and start-up businesses are unable to obtain loans of any kind other than from the Small Business Administration. Now the one source of funding that has functioned reasonably smoothly in these troubled times, the angel market, is in danger of being tied up in red tape.

We need to let our federal and state governments know that this bill is a disaster. It is time to start howling with rage.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.

Today, I am launching my new firm and with it a website that you can navigate using the links on this page. My office will remain the same -- on the 8th Floor of 1525 Fourth Avenue -- but instead of being of counsel at AXIOS Law, I will be a tenant.

At Myer Law, I will continue to provide corporate and securities legal services, with a focus on four practices areas: drafting and negotiating business contracts, forming start-up companies, advising on private equity placements and forming hedge funds.

I look forward to hearing from clients, attorneys, readers and friends now or in the future.

John A. Myer is a corporate and securities lawyer with Myer Law PLLC in Seattle, Washington. This posting does not constitute legal advice.